Oil Patch cuts back Filed: 01/12/2001

By CHIP POWER Californian staff writer e-mail: ppower@bakersfield.com

Soaring natural gas prices, which are expected to inflate consumer heating bills by an average of 40 percent this winter, are also having an impact in the oil patch.

Companies such as Nuevo Energy, the largest independent oil and gas producer in California, say they can temporarily reduce their use of natural gas in their steam drilling operations and instead sell it to capture handsome prices.

Other companies, such as Aera Energy and Berry Petroleum, say the unprecedented gas price increase is greatly boosting operating expenses and forcing changes in their businesses.

Steam is commonly used in San Joaquin Valley oil fields by companies that improve their recovery by injecting heat into a reservoir through an injection well.

Gene Voiland, president and chief executive officer of Bakersfield-based Aera, said that since his company is a net buyer of natural gas, hard decisions have to be made.

"I think that everyone is assessing what to do," said Voiland, who said Aera has enacted "modest cuts" in its steam injection program as a short-term solution.

The reductions come as the record crude oil prices of 2000 are a thing of the past for now. Local crude prices are $16.75, a sizeable fall from a high of $30.50 in September.

Aera is California's leading oil and gas producer, operating properties from the Los Angeles Basin in the south to the Sacramento Delta in the north. The company says it produces more than 250,000 barrels of oil and 90 million cubic feet of natural gas each day and has proven oil and natural gas reserves equivalent to 1 billion barrels of oil.

Prior to last year, natural gas prices had been comparatively inexpensive and stable for several years, according to the U.S. Department of Energy. However, since May of 2000, the cost of natural gas has soared, and the agency now anticipates that costs during 2001 will be approximately 21/2 the level of prevailing prices experienced in 1998 and 1999.

The price increase in California can be attributed to a number of factors, experts say, including high demand for heating; projections that this winter nationwide will be in a normal temperature range, which would be colder than previous years; a lack of pipeline capacity to import more gas from the U.S. Rocky Mountain region and from Canada; low inventories; and flat domestic gas production levels.

"The present experience is unusual in that gas previously has not remained this high for a sustained period of time," Mark Mazur, acting administrator of the DOE's Energy Information Administration, testified to Congress last month.

He predicted that high prices would moderate but did not predict when.

Also on the bright side, he said that U.S. natural gas supplies would be adequate to meet demand through 2020, the end of a government study period.

However, the volatile prices now are forcing companies in Kern, the state's leading oil producer, to make and contemplate changes.

Only three months ago, when crude was in the $26 range, Aera was applying for permits to "steam-flood" 1,000 wells at the South Belridge Field. Aera CEO Voiland declined to say whether the economics of that large project were viable today. "We are always trying to maximize production, but we don't want to get ahead of ourselves," he said. "We need to have balance."

Officials at Berry Petroleum in Taft say they reduced their use of conventional steam generation boilers in November and December due to natural gas prices.

"Throughout 2000, we increased our steam injection from approximately 50,000 barrels of steam per day (bspd) to 68,000 bspd, and for December and perhaps longer, are reducing this level back to about 45,000 bspd," the company said in a recent statement.

The strategy is to maximize gross margins on each barrel of oil produced, the company said.

"The short-term impact on our oil production should not be material. However, if we operate at lower steaming levels for a protracted period, (revenues) will be impacted," the company said.

The independent oil company in western Kern believes natural gas prices will decline sharply in the spring, if not before.

http://www.bakersfield.com/oil/Story/273445p-255639c.html

-- Martin Thompson (mthom1927@aol.com), January 12, 2001